I remain unconvinced. ETFs are great in theory but how many investors actually achieve the returns? The problem is that people panic at the first sign of bad news. A good advisor helps the client to stay the course.
You have a point. In
The Investor’s Manifesto, William Bernstein claims that to manage their own money well, a person needs four things: an interest in markets, an understanding of probability and statistics, a knowledge of financial history, and the emotional discipline to stick to their plan when things get crazy, and concludes that “no more than a few percent of the population” has the requisite skill set, especially since the critical fourth condition is independent of the other three.
John Templeton famously observed that “The investor who says, ‘This time is different,’ when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.” But that always prompts the question, “What if this time really
is different?” I don't mean to stray off-topic, but I worry about my own ability to keep my nerve in the not too distant future if and when—as I think is eminently possible—unexpectedly severe effects of climate change reveal that capital markets have seriously underpriced this risk, and that there's no going back to business as usual (although arguably in an apocalyptic climate change scenario, the performance of one's portfolio might be among the least of one's worries.)
A good advisor will indeed help their client to stay the course by acting as a kind of circuit breaker against panicky trades, and those who provide this valuable assistance deserve to be paid for their time and trouble like anybody else. But to say it again, it’s not that easy to tell the sheep from the goats in this affair, and Bernstein also warns his readers that you can't be too careful when buying financial services:
People do not seek employment in investment banks, brokerage houses, and mutual fund companies with the same motivations as those who choose to work in fire departments or elementary schools. Whether investors know it or not, they are engaged in an ongoing zero-sum, life-and-death struggle with piranhas.
So, potential behavioural pitfalls excepted, not only is there a paradox whereby a financial advisor can help you only if they can’t (because in knowing enough to distinguish competent and conscientious ones from the other kind, you know enough to manage your own money), there’s a dilemmatic “can’t live with them, can’t live without them” aspect to this most problematic of principal-agent problems as well.
Things were easier for the little guy back in the days of the forty year final salary defined benefit pension plan, but those days are gone, and people now are expected to provide for their own retirements by themselves, a state of affairs that, again according to Bernstein, “makes about as much sense as expecting the average person to be his or her own airline pilot or family surgeon.” It will be interesting to see—in light of all of this—how the operation of the government’s forthcoming Automatic Enrolment Retirement Savings System plays out…
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